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Climate Tango: Principles for Integrating Physical and Transition Climate Risk Assessment with Sectoral Examples

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Executive summary

A systemic approach to understanding and addressing sustainability is critical to the financial sector tackling the complex network of interconnected issues. Despite growing awareness of the interrelation of challenges that face people, nature and climate, we must recognise that integrated assessments of sustainability issues remain at an infant stage. To address this will require significant attention in the coming years to bring disparate areas of research together in the same dance.

ClimateWise has long focused on climate-related risk assessment research. In this report we step further toward the required systemic approach by exploring the combined financial impact of physical and transition risks. As part of the UNEP FI TCFD programme, our research has developed theoretical principles and practical steps for implementation of an integrated assessment of physical and transition risks with examples of sectoral analysis. The research builds on the existing methodology and tools from ClimateWise and the wider market, as well as workshops and interviews with the UNEP FI TCFD programme.

We propose five principles for conducting a combined assessment of physical and transition risks (integrated climate-risk assessment). These principles are then unpacked in a step-by-step process to apply the ClimateWise physical and transition risk frameworks, to help financial institutions implement this approach and build understanding amongst staff. In the Appendix of this report, sectoral analyses illustrate how the principles and steps are applied, for example assets in Sectoral Analysis 1: Aviation, Sectoral Analysis 2: Coalpowered plants and Sectoral Analysis 3: Offshore wind turbines in the EU).